Stocks

stock

an investment that represents ownership in a company, entitling the holder to a share of the company's profits

dividends

a payment made to stockholders as a way to divide (or distribute) the company's profit amongst the owners of the company

market capitalization

the total value of a company's shares of stock; calculated as the market price times the number of shares outstanding (also known as market equity, market cap, or market value)

stock valuation formula

the present value of a stock's future cash flows, which include dividend payments and the terminal value which you expect to receive when you sell the stock

discount rate

the rate of return you require to invest in the stock depending on (1) delay and (2) uncertainty

growth rate

the rate at which you expect dividends to grow each year

terminal value

the price at which you expect to be able to sell the stock in the future; also represents the intrinsic value of the stock at the time you plan to sell the stock in the future

long term growth

the rate at which you expect dividends to be able to grow forever

Gordon Growth model

a mathematical formula used to determine the value of a future set of cash flows that grow at a constant rate forever

dividend discount model (DDM)

a mathematical formula used to estimate the intrinsic value of a stock based on the present value of expected future dividends

undervalued

an investment can be purchased for less than its intrinsic value; that is, the market price is lower than what you think the investment is actually worth and is therefore a good deal

overvalued

an investment is trading at a price that is higher than its intrinsic value; that is, the market price is higher than what you think the investment is actually worth and is therefore a bad deal

dividend yield

the return an investor would earn from a stock based solely on its dividend payments; calculated as the annual dividend divided by the current market price

capital gains yield

the return an investor would earn from a stock based solely on the increase in its market price; calculated as the percent change in the market price of a stock relative to what you originally paid for it

common stock

an investment representing ownership in a company, giving the investor a share in the company's profits and the right to vote about the company's business activities

preferred stock

an investment representing ownership in a company, giving the investor a share in the company's profits through a fixed dividend payment but no right to vote about the company's business activities

large cap stock

a company with a large market value; usually refers to a company that is really big

small cap stock

a company with a small market value; usually refers to a company that is really small